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Isn’t Working Capital Bad For Your ( Business) Health ?

Guest post by: Stan Prokop

Article Overview: Understanding and measuring business capital Needs ;Information on business capital and why working capital might not be what you think it is! Cash flow solutions explained. Cash flow measurement tools.

Isn’t Working Capital Bad For Your ( Business) Health ?

We can hear our clients now! How possibly could working capital (isn't that cash flow?) be bad for my firms financial health. Let's talk about that.

The technical financial folks define working capital as a very basic calculation that even the non financial business owner can do - simply deduct your current liabilities from your current assets ( from your balance sheet statement) and, voila ! Congratulations, you have working capital. Hopefully that number is a positive number, because when it's negative you're technically insolvent and that's a subject and solution for another day!

Anyway, our working capital number is positive - that's good, right. Not necessarily, and that's the premise of our info we share here , because if you have positive working capital your funds are tied up in receivables, inventories and pre paid items .

It is therefore very important to understand what makes up working capital, how you can monetize or cash flow it, and most importantly, but often totally overlooked , how you can measure business capital and working capital .

The essence of measuring your working capital revolves around turnover, days sales outstanding, inventory turns, and payables days outstanding.

The good news is that you can very easily calculate and track these measurements, and we can virtually guarantee they will better assist you to understand why your investment in working capital is very much a teeter totter of good news/bad news.

Do you like to travel? Money does also, and considers how long it takes for a dollar to travel through your company. From the day you place an order, purchase product, pay for product, bill a receivable, and yes, collect that receivable that total cycle can be easily 200 days, if note more. That's a lot of travel, so you hopefully can see our premise here that your investment in your working capital accounts is not necessarily a great thing.

Your business is composed primarily of inventory, receivables, and payables, (also fixed assets). We therefore strongly suggest to clients that they understand the turnover and overall return they are getting from these key asset accounts.

You would understand your working capital situation somewhat better if it were not for those pesky issues that you can't control - business owners and financial managers recognize them well and run into them every day. They are sales growth and decline, your fixed costs that you have to pay and manage no matter what, and any financial distress you may be experiencing from past external factors - i.e. a bad year, etc,

The holy grail of business capital and working capital financing is when you have strong controls on internal asset turnover and at the same time you have access to external working capital via bank lines, based lending']);"> asset based lending facility, loans, grants, etc.

We constantly remind clients that if they are turning over their working capital accounts more efficiently all the time its in effect a measure of the true success of your company - think of it, you're buying things, paying supplies on time, and customers are paying you on time and ordering more goods and services. A quick tool for measuring your progress in this area is simply to take your receivables days and inventory days, subtract your payables days outstanding, and if that number is improving , or going down you are winning the 'working capital is bad for your health' premise we have presented.

As a Canadian business owner you are both granting credit and requesting credit (customers and suppliers respectfully). Understanding business capital in this manner will allow you to finance better internally and borrow via banks, finance firms, asset based lenders, etc.

Speak to a trusted, credible and experienced business financing advisor about our ' health' problem and what your tools and solutions might be for better business success.

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Article Tags: business capital, business health, cash flow solutions, working capital



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